A Cautious Holder

You may recall that on that last expiration, Friday, Dec. 21 (which happened to be a quadruple expiration), the market sold off and sold off hard. Not only that, but it gapped down big time and left overhead gaps to be filled. That selloff was in response to House Speaker John Boehner's inability to get Plan B to a vote in the House the day before, and at about 8:00 p.m. that evening, the S&P 500 Emini futures collapsed about 50 points. Yes, it's ancient history now, but what's important about that episode was the gap that was left and the subsequent island that has since been created.

The futures sold off to a low of 1391.25. That level wasn't seen in Friday's open outcry session, as the low, once the cash markets began trading, was only 1416.50. But there was that massive gap left from 1440.50 to 1428.00 that wasn't revisited until this past Wednesday, Jan. 2. That day, the market popped up from its New Year's Eve close of 1420 and shot up to 1444. That level was the low on Jan. 2, so the Jan. 2 gap in the futures is 1420-1444. That's a massive gap.

In the process of creating that gap, two islands were formed. First, was a huge island from 1428 to 1440.50, up to the top of the Dec. 21 gap. That is very bullish for the market. But it also represents a massive target for the market in the event of a pullback toward that area. The second island is barely visible. It's based on the tiny sliver of a gap left from Dec. 24. That gap was 1425.75-1426. It's just one tick wide, but it's there and it's another target for the futures in the event of a pullback. And yes, it's on the charts of about a million technicians' computers, so keep an eye on it.

One reason I highlight the futures chart is because the chart of the cash, the S&P 500, is not very helpful when it comes to these things. Gaps often don't show up in the S&P 500, islands are extremely rare, and Wednesday's non-gap and non-island is a good illustration. The massive gap-up opening from Monday's close, which should have produced a five-point gap from 1426.19, isn't there at all. What is there, however, is the prior multiyear high from mid-September at 1474.51. That's now an upside target for this move. It's really a minimum upside objective, given the continued strength by the Russell 2000 and the bullish implications of the bullish island reversals.

As noted, the Russell 2000 is making new all-time highs. This, in fact, is the third straight day it has made higher all-time highs. That bodes well for the Russell 2000 and for the rest of the market. A pullback can be expected at any time, and I will likely be selling my remaining positions in this sector into further strength, perhaps at today's close.

There were many reasons to look for a bottom a couple of weeks ago on that expiration Friday. Some of you may have noticed (in fact, some of you emailed me about it over the holidays) that the selloff in the Nasdaq-100 actually bottomed on Thursday, Dec. 20, just pennies below the Nov. 23 gap at the 2600 level. Then on Friday, Dec. 21, while the blue chip indices made lower lows, the Nasdaq indices failed to confirm and that, too, was a bullish omen.

There were other things going on that day that signaled that it was time to get back into the fray. For one, the Volatility Index (VIX) had just popped up to a multi-month high just shy of 20. That level was later eclipsed Dec. 28, last Friday, as the VIX popped to 23.23, signaling another time to buy. But now? Now that the VIX is collapsing to multi-month lows back below the 14 level, I can't get too excited about buying. I am, at best, a cautious holder. It's noteworthy that on this drop in the VIX, that gap from Oct. 8 at 14.33 was filled. That occurred Thursday.

The bottom line is that I am a cautious holder here at current levels (up to a maximum of 45% invested at Guggenheim), and will likely sell more of my positions once the S&P 500 tags its prior highs at 1474.51.

At the time of publication, Schiller was long S&P 500, Nasdaq 100, Russell 2000, and high-yield bond funds at Rydex up to 45% levels; long junk bond funds at Fidelity up to 20% levels; holding bullish short puts in the IWM, QQQ and SPY; long DIA calls and call spreads; and holding bullish January and February (put) credit spreads in AAPL.